Jay Company uses a standard cost system. During the past year, the variances from
standard were significant. Jay is considering whether to allocate the variances among the
appropriate inventory accounts and cost of goods sold or to allocate all of the variances
directly to cost of goods sold. Under which one of the following situations would reported net
income be largest?

All of the variances are favorable and are written off directly to cost of
goods sold. All of the variances are unfavorable and are written off directly to cost of
goods sold. All of the variances are favorable and are allocated among cost of goods
sold and ending inventory accounts.All of the variances are unfavorable and are allocated among cost of goods
sold and ending inventory accounts

Correct - Your answer is correct.

Wrong - Your answer is wrong.

Detailed Answer

Answer (A) is correct.
When favorable variances are written off directly to cost of goods sold,
cost of goods sold decreases, which in turn increases net income in full
by the entire variance amount.